Monetary-Exchange Rate Policy and Current Account Dynamics

Hamza Malik

SBP Research Bulletin, 2006, vol. 2, 23-57

Abstract: A dynamic stochastic general equilibrium monetary model with incomplete and imperfect asset markets, monopolistic competition and staggered nominal price rigidities is developed to shed light on the role of exchange rate and its relation with current account dynamics in the formulation of monetary-exchange rate policies. The paper shows that the dynamic relationship between real exchange rate and net foreign assets affect the behavior of domestic inflation and aggregate output as a result of incomplete risk sharing due to incomplete asset markets.This, in turn, implies that the optimal monetary policy should entail a response to net foreign asset position or the real exchange rate gap defined as the difference between actual real exchange rate and the value that would prevail with flexible prices and complete asset markets. In comparing the performance of alternative monetary-exchange rate policy rules, an interesting and fairly robust result that stands out is that ‘dirty floating’ outperforms flexible exchange rate regime with domestic inflation targeting.

Date: 2006
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sbp.org.pk/research/bulletin/2006/Monetary_Exchange_Rate_Policy.pdf (application/pdf)

Related works:
Working Paper: Monetary-Exchange Rate Policy and Current Account Dynamics (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sbp:journl:05

Access Statistics for this article

More articles in SBP Research Bulletin from State Bank of Pakistan, Research Department Contact information at EDIRC.
Bibliographic data for series maintained by Faisal Saleem ().